- (1.) THIS reference under s. 256(1) of the INCOME TAX ACT, 1961, is at the instance of the assessee to answer the following question of law: " Whether, on the facts and in the circumstances of the case and on a correct interpretation of s. 80M of the INCOME TAX ACT, 1961, the Tribunal was justified in holding that deduction under S. 80M should be given on the net dividend income, i.e., after deducting proportionate expenses ? "
(2.) THE relevant assessment year is 1973 -74. The assessee is a limited company. During the corresponding previous year, the assessee received dividend income of Rs. 6,81,643. A deduction of Rs. 3,81,311 was made in accordance with S. 80K of the Act and worked out the balance at Rs. ,00,332. Out of this amount, the ITO deducted Rs. 18,300 as expenses giving the net dividend income at Rs. 2,82,032. The ITO granted relief in accordance with S. 80M of the Act at 606 per cent of this amount, i.e., the net dividend income. The assessee preferred an appeal to the AAC which was dismissed, affirming the view taken by the ITO regarding the construction of S. 80M of the Act. The assessee's further appeal to the Tribunal has also failed. The Tribunal also rejected the assessee's contention that the benefit in accordance with S. 80M of the Act is to be computed on the basis of the gross dividend income instead of net dividend income. Aggrieved by the view taken by the Tribunal, the assessee sought a reference to this Court which has led to the above question of law being referred to this Court for our decision. 3. In view of the law as settled by the recent decision of the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 155 ITR 120 (SC), the reference has to be answered against the assessee. No doubt section 80M of the Act was earlier construed by the Supreme Court in Cloth Traders (P) Ltd. vs. Addl. CIT (1979) 118 ITR 243 (SC), in the manner con tended by the assessee, taking the view that the benefit under S. 80M of the Act had to be computed on the basis of the gross dividend income and not on the net dividend income. Thereafter, the Legislature stepped in and the Act was amended by inserting S. 80AA, retrospectively w.e.f. April 1, 1968, with a view to overcome the Supreme Court case in Cloth Traders (P) Ltd. vs. Addl. CIT (supra), by clearly providing that this benefit under S. 80M was to be computed on the basis of the net dividend income and not gross dividend income. This amendment led to a challenge to its constitutional validity before the Supreme Court and the decision of the Supreme Court in that case is reported in Distributors (Baroda) (P) Ltd. vs. Union of India (supra). A larger Bench of the Supreme Court took the view that the earlier decision in Cloth Traders (P) Ltd. vs. Addl. CIT (supra), by a smaller Bench was incorrect and that, properly construed, S. 80M, as it stood from the very outset, gave benefit thereunder only on the basis of net dividend Income and not gross dividend income. Accordingly, it was held that the insertion of s. 80AA was merely to declare the law as it existed from the very outset and not to introduce an additional tax burden retrospectively. After this decision of the Supreme Court, there can be no doubt that the view taken by the Tribunal in the present case was correct.
(3.) CONSEQUENTLY , the reference is answered in favour of the Revenue and against the assessee as under: " The Tribunal was justified in construing S. 80M of the INCOME TAX ACT, 1961, to mean that the deduction thereunder should be given only on the net dividend income." ;